What's a Reasonable Retirement?

Many public employees are guaranteed 90% or more of their final salary for the rest of their life.  Is this really reasonable?  Let's take a look at how much an individual needs to maintain the standard of living he or she held while employed.

How much of my income do I need to replace as a retiree?  Assume you are earning $58,482--the average salary of a Michigan public school teacher. The following expenses you would not have as a retiree:

Total expenses no longer incurred by this retired worker are $16,322 or 28% of wages.  So to maintain our retiree's standard of living they might hope to have a retirement income of $42,160, or 72% of what they earned while working.  

If that individual were to retire today, he or she should expect to receive $20,040 from social security (already over one-third of his or her working salary).  Assuming this teacher taught from age 22 to 62, he or she will have a pension equal to 60% of final average wage which is over $35,000 annually.  With social security and a pension, this retiree is already guaranteed $55,000 every year without having to contribute personal savings.  Compare this to those in the private sector who have to put away money their entire working careers to maintain a comfortable living standard in retirement.

As a society, we need to ask ourselves what is a reasonable retirement.  How much should an employer be expected to fund their employees' retirements?  How much should a worker be expected to save for his or her own retirement?  It seems that if employees want to make 70% or more of their highest paying years' income--more than what is necessary to maintain their standard of living--they should be responsible for saving for that themselves.

If pension payments are capped at a more reasonable level, it will save taxpayers millions of dollars while still providing a quality retirement for Michigan's public employees.  The table below shows what individuals of various income levels could expect to receive from social security and a more reasonable pension capped at 30% of final average compensation.  The last row shows what the retirees would need to draw from personal savings if they wanted to make their retirement income equal to their final working salary.